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The week in review: Jan-Feb industrial profits soar, regulators tighten grip on rating firms, local governments to step up debt risk control

Beijing skyline_adobe_575px_20Oct20
By Addison Gong
29 Mar 2021

In this round-up, profits at industrial firms in China surge for the first two months of the year, onshore credit rating agencies face increased scrutiny, and local governments are required to manage debt risks at local state-owned enterprises in a better way.

US president Joe Biden has invited 40 world leaders, including Chinese president Xi Jinping, to the virtual Leaders Summit on Climate on April 22 and 23, the White House said last Friday.

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China’s foreign debt totalled Rmb15.665tr in 2020, or $2.4tr in dollar terms, making up 16.3% of the country’s GDP, according to data from the State Administration of Foreign Exchange.

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Industrial profits in China surged 179% year-on-year for the first two months of 2021 to Rmb1.114tr, showed Saturday data from the National Bureau of Statistics (NBS). While the increase was skewed by the low base of comparison last year due to the outbreak of the Covid-19 pandemic, the number is still up 72.1% compared to the same period in 2019.

In addition to low bases, factors such as stabilising domestic and foreign demand and the government’s ‘stay put’ for Chinese New Year policy contributed to the surge, said the NBS.

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The China Banking and Insurance Regulatory Commission (CBIRC), the People’s Bank of China (PBoC) and the Ministry of Housing and Urban‑Rural Development jointly issued a notice requiring the banking industry to make sure that business loans are not flowing into the real estate market.

Lenders are forbidden to provide business loans to shell companies, and have to undertake a stricter examination process when lending to borrowers with an under one year history and those which have held a mortgaged property for less than a year.

Local authorities will wrap up an inspection into the illegal use of business loans in the property market by May 31.

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The CBIRC has officially published the debt management guidelines for commercial banks, having taken feedback for draft regulations earlier this year.

Lenders are required to set internal quotas and use relative ratios, including net stable funding ratio and core debt ratio, to manage their debt risks. They must diversify their debt and make sure their liabilities match their assets — in terms of the tenor, currency, interest rate and foreign exchange rate — and keep the cost of funding reasonable. Banks have been told to submit their internal debt management annual reports before the end of March every year.

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The PBoC, together with the CBIRC, CSRC, Ministry of Finance and the National Development and Reform Commission (NDRC), is taking public feedback for a set of rules aimed at helping the “healthy and high quality development” of the domestic credit ratings industry.

Draft rules published on Sunday require Chinese rating agencies to increase independency, consistency, accuracy, and the timeliness and effectiveness of ratings. They also need to strengthen information disclosure and corporate governance, and put default rates at the core when it comes to evaluating the quality of ratings.

Agencies should work towards gradually reducing the number of institutions with a high rating and establish a system with more credit differentiation. They have been asked to launch internal inspections when an issuer’s rating changes by three notches or more to ensure consistency and accuracy, and provide follow-up reports when events occur at issuers that could significantly affect their debt servicing abilities.

The rating agencies also have to strengthen internal controls. They have been encouraged to install independent directors, reinforce firewall and use other measures to avoid conflicts of interest.

In addition, regulators are encouraging issuers to hire more than one rating agency, and expand the use of the investor-paid model in the industry. They also plan to lower the minimum rating requirements for different types of investors in the bond market. The regulators are encouraging more qualified foreign rating agencies to start businesses in the Mainland, and for domestic agencies to actively participate in the international market.

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Nafmii has revised the information disclosure guidelines for medium-term notes, short-term commercial paper and super short-term commercial paper, after the CSRC, NDRC and the PBoC moved to unify information disclosure requirements for corporate bonds late last year. The updated Nafmii guidelines strengthen information disclosure for major shareholders as well as for matters such as asset reorganisation and investor protection.

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The State Council’s State-owned Assets Supervision and Administration Commission (Sasac) on Sunday issued new guidelines on the management of debt risks at local government-owned enterprises (local SOEs).

Local governments have been told to establish a mechanism based on the debt situation in their regions to identify risks, using different metrics such as overall debt levels, debt structure, profitability and asset quality to evaluate the companies. Local Sasacs should also guide the SOEs to reduce their debt and leverage through measures such as reining in investment, introducing strategic investors and conducting debt-to-equity swaps. Hidden debt must be controlled, and local authorities should limit the ratio of outstanding equity-like instruments — such as perpetual bonds — to net assets. Cross-guarantees must be strictly forbidden, the Sasac added.

SOEs with low credit ratings, large maturities, tight cash flows and poor profitability must be closely monitored to prevent bond default risks. The Sasac added that local governments could explore setting up annual issuance quota for SOE bonds. Additionally, local governments must urge their SOEs to make early arrangements for debt payments, help those facing difficulties use debt extension or exchange to dispose risks, and prevent debt evasion.

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China Telecom Corp is working with China International Capital Corp for its pre-IPO education or ‘tutorial’, a process required for domestic listings ahead of an IPO, according to an update on the CSRC Beijing bureau’s website. China Telecom’s board will be seeking approval in an April 9 shareholder meeting for the issuance of up to 12.1bn A-shares on Shanghai’s mainboard, or 13% of the company’s enlarged share capital pre-greenshoe.

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Huawei Technologies has secured a digital payment licence, after it acquired 100% of Shenzhen Sharelink Network Co from Shanghai Wo Rui Ou, onshore media reported. Shenzhen Sharelink has a payment licence that is valid through 2024.

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The CBIRC’s inclusive finance department head, Li Junfeng, has been named the party committee head at China Great Wall Asset Management Co, the 21st Century Business Herald reported.

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The PBoC conducted a central bank bill swap operation last Friday. The three month bills are worth Rmb5bn.  

By Addison Gong
29 Mar 2021